Falling TV Prices Offer View of Future Industry Problem

By Erik Sherman

Updated on: November 3, 2008 / 8:40 AM
/ MoneyWatch

On the surface, the New York Times seemed to run yet another of its occasional non-story trend stories yesterday, this time by about the consumer electronics industry. The urgent tone was that fewer consumers are ready to drop large amounts of dollars on big-screen televisions these days, forcing retailers into -- gasp! -- offering discounts to keep the product moving. What, people have less money these days and stores might drop prices on product when they aren't selling enough volume? And when it rains, people get wet and look for umbrellas. Fascinating. Sarcasm aside, though, there was a nugget of information that offered a sideways glance at how the television manufacturers may have been doing business.

The reporter interviewed analyst firm DisplaySearch (owned by NPD Group), which said that prices could drop literally by $200 a unit. That's enough to bring the cost of a 42-inch plasma set down to about $600 and a 32-inch LCD to $400. It was only a few years ago that such devices would have gone for thousands.

Consumer electronics margins may be slim, but big-screen TVs are supposed to be one of those big-ticket items. How often can a retailer count on significant add-on sales to boost profits? What exactly are they going to add on? Maybe a sound system, maybe installation, but the majority of sales will depend on the major item itself.

That would suggest one of two things. The one that is difficult to believe is that successful retailers have no idea of how to price to make more money often enough to increase profits. Although Circuit City may be having enormous problems with rumors of closing 150 of its over 700 stores, it has been an anomaly when you consider Best Buy, Target, Wal-Mart, and Costco. Many retailers have figured out how to profitable sell gadgets of all sorts.

We're left with the alternative: big-screen television units have been significantly more profitable than you might have thought. There is no other way that companies could be considering a 25 to 35 percent price cut, given that is on the part that isn't going to the manufacturer. Yes, some stores could be running a loss-leader, but that's a pretty big one with not enough that I can think of to fatten the bill.

But this is a dangerous strategy. On one hand, the retailers are driven by the need to keep their quarterly numbers at least someone respectable for Wall Street. However, it's a long-term dangerous strategy. The retailers must gamble that eventually vendors will see significant cost reductions that will eventually trickle down to the channel, because once you drop the price by $200, it's going to be hard to regain that ground, even if stores do point to special holiday prices. When consumers realize how little the stores can charge, they're not likely to pay full price again.

Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.